HMRC has collected an extra £14.4m in tax from insolvency cases over the two tax years to 2023 since regaining its “preferential creditor” status.
The preferential status known as “coronavirus preference” was reinstated for HMRC in December 2020, giving it priority in recovering tax owed from insolvent businesses ahead of other unsecured creditors, including banks and suppliers. The change marks the return of a status HMRC lost in 2003.
Mark Boggi, a partner in the restructuring services practice at Forvis Mazars, described the crown preference system as controversial. “It often results in unsecured creditors, such as suppliers, getting nothing when a company goes bankrupt. This is particularly damaging to smaller suppliers who now find themselves at the bottom of the pile during insolvency proceedings,” he said.
Crown Preference also outperforms lenders that use floating mortgage guarantees, raising concerns that its reintroduction could prompt banks to cut the amount they lend to businesses and raise interest rates. The changes reflect the increased risk banks face of not getting their loans back if a company goes bust.
Despite the intended benefits of Crown Preference for HMRC, Boughey questioned its overall effectiveness given the modest £14.4m recovered so far. “The amount of money raised through Crown Preference is surprisingly small. This money could have a significant impact on other creditors, particularly smaller suppliers.”
Mr Bogie suggested that transferring more money to suppliers and lenders could boost bank funding and credit lines from suppliers, benefiting the wider economy. “The amount HMRC brings in through the Crown Preference scheme is expected to rise significantly in the coming years, particularly given the recent increase in insolvencies. It will be interesting to see how these figures develop,” he added.